TRADE THE FED DECISION
TRADE THE FED DECISION The much anticipated December 14 Federal Reserve decision seems to be largely factored in by the markets, with an implied Fed hike probability well over 70% plus (92% as of November 15). This is astonishing especially given the US election upset and potential 180 degree regime shift of just a few days ago (November 8). The fact that we have had many cases of the Fed promising to hike, then back tracking – it had initially predicted four hikes this year – and the fact that the dollar as well as US Treasuries have had exceptionally strong moves upwards (both in essence acting as tightening levers), has had analysts wondering whether or not the market is right or wrong on this.
What are the implications if it fails to hike? What scenarios over the next few weeks could increase the probability of the Fed once again back tracking? And what elements could solidify the decision further? What if the Fed not only hikes, but ends up being very hawkish in its outlook? Perhaps the most important thing is less about the potential hike on December 14, but the lack of conviction by the market of a much more aggressive and hawkish Fed. Especially given recent suggestions by Fed members, implying that a Trump presidency that see’s reflationary fiscal spending measures, could make it possible for the Fed to speed up their journey to normalisation.
WILL THE FED HIKE RATES IN DECEMBER 2016?
NO
YES
IS THE FED’S CREDIBILITY LOST COMPLETELY? YES
NO RISK POSITIVE
USD lower, EM currencies outperform. Global equities higher, US outperforms, US Treasuries rally, 10-year yield falls to sub 1.5%.
WHAT TYPE OF HIKE WILL IT BE?
RISK NEGATIVE
USD lower, EM ccys knee-jerk stronger then sell off. Equity markets sell off globally on central bank confidence loss. US Treasuries rally on safe haven.
DOVISH HIKE
Fed lowers dot plot from two hikes in 2017 and three in 2018. Dovish shift of Fed voting members means 2017 voting panel is marginally more dovish.
HAWKISH HIKE
Fed maintains current path with dotplot. Adds language that inflation expectations are increasing. May achieve inflation target earlier than expected.
1. TRADE VIEW: USD DOWNSIDE: *Sell USD/EM
2. TRADE VIEW: USD DOWNSIDE: *DXY Lower *USDCHF OT
3. TRADE VIEW: USD DOWNSIDE: *USDJPY Upside RKo *Sell USD/Em for short term move
4. TRADE VIEW: USD UPSIDE *DXY Up *Buy USD/EM
CLICK HERE FOR DETAILS.
CLICK HERE FOR DETAILS.
CLICK HERE FOR DETAILS.
CLICK HERE FOR DETAILS.
2017 GROWTH AND INFLATION OUTLOOK?
FED BEHIND THE CURVE, MARKETS PRICE TWO HIKES
Late cycle economic growth continues. Inflation risk on the rise. Fed forced to raise rates very rapidly. Equity markets destabilised. USD rapidly strengthens.
INFLATION DOESN’T MATERIALISE, FED ON HOLD
Slow growth, low inflation continues. Inflation remains below Fed target. US equities perfom . EM currencies perform on carry trade.
INFLATION DOESN’T MATERIALISE, FED STOPS
Slow growth, low inflation continues. Inflation remains below Fed target. US performs slowly. EM Bond Inflows restart slowly.
INFLATION PICKS UP, THE FED CONFIRMS MORE HIKES TO COME US equities selloff. EM currencies sell off.
5. TRADE VIEW: USD DOWNSIDE: *Buy USD/EM *Buy USD/JPY Call Spread
6. TRADE VIEW: USD DOWNSIDE: *Sell USD/EM *Buy NZD Call Spread
7. TRADE VIEW: USD DOWNSIDE: *Buy USDJPY downside Rki
8. TRADE VIEW: USD DOWNSIDE: *DXY Up *Sell USD/JPY Risk Reversal
CLICK HERE FOR DETAILS.
CLICK HERE FOR DETAILS.
CLICK HERE FOR DETAILS.
CLICK HERE FOR DETAILS.
What are the implications if it fails to hike? What scenarios over the next few weeks could increase the probability of the Fed once again back tracking? And what elements could solidify the decision further? What if the Fed not only hikes, but ends up being very hawkish in its outlook? Perhaps the most important thing is less about the potential hike on December 14, but the lack of conviction by the market of a much more aggressive and hawkish Fed. Especially given recent suggestions by Fed members, implying that a Trump presidency that see’s reflationary fiscal spending measures, could make it possible for the Fed to speed up their journey to normalisation.
WILL THE FED HIKE RATES IN DECEMBER 2016?
NO
YES
IS THE FED’S CREDIBILITY LOST COMPLETELY? YES
NO RISK POSITIVE
USD lower, EM currencies outperform. Global equities higher, US outperforms, US Treasuries rally, 10-year yield falls to sub 1.5%.
WHAT TYPE OF HIKE WILL IT BE?
RISK NEGATIVE
USD lower, EM ccys knee-jerk stronger then sell off. Equity markets sell off globally on central bank confidence loss. US Treasuries rally on safe haven.
DOVISH HIKE
Fed lowers dot plot from two hikes in 2017 and three in 2018. Dovish shift of Fed voting members means 2017 voting panel is marginally more dovish.
HAWKISH HIKE
Fed maintains current path with dotplot. Adds language that inflation expectations are increasing. May achieve inflation target earlier than expected.
1. TRADE VIEW: USD DOWNSIDE: *Sell USD/EM
2. TRADE VIEW: USD DOWNSIDE: *DXY Lower *USDCHF OT
3. TRADE VIEW: USD DOWNSIDE: *USDJPY Upside RKo *Sell USD/Em for short term move
4. TRADE VIEW: USD UPSIDE *DXY Up *Buy USD/EM
CLICK HERE FOR DETAILS.
CLICK HERE FOR DETAILS.
CLICK HERE FOR DETAILS.
CLICK HERE FOR DETAILS.
2017 GROWTH AND INFLATION OUTLOOK?
FED BEHIND THE CURVE, MARKETS PRICE TWO HIKES
Late cycle economic growth continues. Inflation risk on the rise. Fed forced to raise rates very rapidly. Equity markets destabilised. USD rapidly strengthens.
INFLATION DOESN’T MATERIALISE, FED ON HOLD
Slow growth, low inflation continues. Inflation remains below Fed target. US equities perfom . EM currencies perform on carry trade.
INFLATION DOESN’T MATERIALISE, FED STOPS
Slow growth, low inflation continues. Inflation remains below Fed target. US performs slowly. EM Bond Inflows restart slowly.
INFLATION PICKS UP, THE FED CONFIRMS MORE HIKES TO COME US equities selloff. EM currencies sell off.
5. TRADE VIEW: USD DOWNSIDE: *Buy USD/EM *Buy USD/JPY Call Spread
6. TRADE VIEW: USD DOWNSIDE: *Sell USD/EM *Buy NZD Call Spread
7. TRADE VIEW: USD DOWNSIDE: *Buy USDJPY downside Rki
8. TRADE VIEW: USD DOWNSIDE: *DXY Up *Sell USD/JPY Risk Reversal
CLICK HERE FOR DETAILS.
CLICK HERE FOR DETAILS.
CLICK HERE FOR DETAILS.
CLICK HERE FOR DETAILS.
